Fineman’s Revelation, And The Coming Entitlement Depression
Meant to blog on this yesterday, when the whole world was, but got busy…in case you missed it, Howard Fineman dropped quite a bombshell:
A Democratic senator I can’t name, who reluctantly voted for the health-care bill out of loyalty to his party and his admiration for Barack Obama, privately complained to me that the measure was political folly, in part because of the way it goes into effect: some taxes first, most benefits later, and rate hikes by insurance companies in between.
Besides that, this Democrat said, people who already have coverage will feel threatened and resentful about helping to cover the uninsured—an emotion they will sanitize for the polltakers into a concern about federal spending and debt.
On the day the president signed into law the “fix-it” addendum to the massive health-care measure, two new polls show just how fearful and skeptical Americans are about the entire enterprise. If the numbers stay where they are—and it’s not clear why they will change much between now and November—then the Democrats really are in danger of colossal losses at the polls. (emphasis mine)
It’s becoming more and more clear in hindsight that this bill is a fiscal catrastrophe. How bad is the budget picture? This bad:
America is digging itself into a deep fiscal hole. In 2009, the federal government spent $3.5 trillion, but took in only $2.1 trillion in revenue — thus spending $1.67 for every dollar it collected. The resulting $1.4 trillion deficit was equivalent to 10% of the nation’s economic output, the highest percentage since the end of World War II. America’s publicly held debt now totals $7.5 trillion, about 53% of gross domestic product — the highest it has been in more than 50 years.
These figures are alarming, but they pale in comparison to budget projections for the years ahead. Recent numbers from the Obama administration show that if current policies were to remain in place, deficits would average more than $1 trillion annually for the next ten years, amounting to more than 5% of GDP. Those deficits would then ensure that the national debt would grow much faster than the economy: By 2020, the United States would owe more than $20 trillion, the equivalent of about 85% of GDP. At that point, interest payments alone would consume about $900 billion a year — almost five times as much as they did in 2009.
The outlook grows even more bleak when we account for the ongoing retirement of the Baby Boomers and further increases in public spending on health care. According to the Congressional Budget Office, spending on Medicare, Medicaid, and Social Security is on track to grow from about 10% of GDP today to about 16% in 2035. At the same time, the aging of the population means that the labor force — and, therefore, tax revenues — will grow more slowly in the future. The twin pressures of increased entitlement spending and slowing revenue growth mean that the debt will skyrocket — to roughly 200% of GDP in 2035, under one CBO scenario — unless there are dramatic cutbacks in all other government activities or an equally dramatic increase in taxes.
…Our current staggering deficits are therefore just a small part of a much larger fiscal dilemma. The financial crisis has added several trillion dollars to America’s indebtedness, but our structural deficits — which will continue even after the economy recovers — are on track to add tens of trillions of dollars more in the coming decades.
Budget-watchers once spoke of these looming challenges as a distant, long-term threat — something quite separate from the more pressing budget challenges that we might face over, say, the next ten years. That is no longer true. Today, those big “long-term” troubles are our urgent problems; they start to materialize within the usual ten-year budget window. Spending on Social Security benefits, for instance, is projected to exceed Social Security tax revenues in 2010 and 2011, and the Medicare trust fund is projected to run out of money in 2017. We now live in a world in which financial markets speculate about the odds of the U.S. government’s defaulting, and in which major foreign creditors express concern about our ability to pay our debts.
This is the real tragedy of the health reform debacle. Even if the bill proves to be revenue neutral or actually reduces the deficit (a prospect I find highly unlikely for reasons discussed elsewhere), it has taken many of the potential deficit-reducing savings and “revenue enhancements” out of the picture for deficit reduction, since those dollars are by and large pledged to the cause of increasing insurance coverage…meaning, much of the long-hanging fruit is gone, and true deficit reduction of the size that could make a difference will prove very elusive, given the cowardice of Congress with respect to spending cuts, and the vast unpopularity of tax increases.
We’re in for a long, bumpy ride…and we’re running on a single engine and low fuel…